Beat the S&P 500 Index with the S&P 500 Index

Want to win a steak dinner, $20 or just a friendly wager?

Next time you’re speaking with your accountant, investment adviser or other financial professional, ask them:

"Can you beat the S&P 500 with the S&P 500?"

They might look at you a little funny. But, my personal interactions tell me most will respond "no."

That’s the wrong answer because it’s doable.

But admittedly, it’s sort of a trick question.

The twist is there are two different S&P 500s with the same 500 stocks. But their construction is very different.

  There’s the good old S&P 500 Index that everyone knows about, which is the capitalization-weighted version.

  Yet, there’s also the equal-weighted version of the S&P 500 Index.

The S&P 500 Equal Weight Index includes all the same constituents as the S&P 500 Index. But there is one significant difference. Each company is allocated a fixed weight of 0.2%.

So, while the standard S&P 500 Index has 19% of its weight devoted to its top 10 names, you’d have to go 95 names deep in the S&P 500 Equal Weight Index to match that same 19% weight.

For example, Apple has a 3.7% weight in the S&P 500 Index (cap-weighted). But, in the S&P 500 Equal Weight Index, Apple has the same 0.2% weight as Illumina, NRG Energy, Skyworks Solutions and all the other constituents in the index.

In 2003, Guggenheim launched the original strategic beta ETF, the Guggenheim S&P 500 Equal Weight ETF (RSP). That’s the first ETF to abandon a market-cap-weighted approach and embrace an alternative-weighting strategy in the form of equal weighting.

Generally speaking, a cap-weighted index overweights the overpriced and underweights the underpriced. With an equal-weighted index, this problem is avoided.

Related story: Use This ETF Tag Team to Beat the S&P 500

William Belden, head of ETF Business Development for Guggenheim, says:

Historically, equal-weight strategies could only be accessed in the institutional marketplace.

Today, with the growth of index-based solutions, the equal-weight approach has gained favor among investors seeking opportunities across multiple capitalizations and geographic regions.

Equal-weight portfolios do not favor a particular group of stocks, sectors, or other market performance factors based on fundamentals or forward-looking projections. Allocations are broadly distributed, providing greater representation of index constituents. Perhaps most importantly, these allocations are regularly rebalanced back to their equal weights.

At the end of the day, it always comes down to performance. And this ETF shines in that area.

The equal-weighted version of the S&P 500 Index has demonstrated a high likelihood of beating the cap-weighted version of the S&P 500 Index each year — and an even-higher probability of beating it over the longer term.

That means not only can you win a bet, but this strategy modification can improve your investment returns from this point forward.

From 2000 to 2016, the S&P Equal Weight Index outperformed the S&P 500 Index in 13 of 17 calendar years. That’s 77% of the time.

And the outperformance adds up over time …

Source: Bloomberg

Over the last 17 years, the S&P 500 Equal Weight Total Return Index (SPXEWTR in chart) returned +314% while the S&P 500 Total Return Index (SPXT in chart) returned +112%.

That’s almost three times the return … just from equally weighting stocks instead of weighting them by market cap.

RSP’s consistent track record of outperformance also validates choosing equal weight over cap weight.

Average Annualized Returns for Rolling Monthly Periods (through 3/31/17)

Source: Morningstar

% of Time RSP Outperformed S&P 500 Index for Rolling Monthly Periods (through 3/31/17)

Source: Morningstar

RSP has impressively outpaced the S&P 500 Index for 100% of rolling monthly periods over the last 10 years! It’s also decisively outpaced the cap-weighted S&P 500 Index over one- (59%), three- (74%) and five-year (83%) periods.

As Guggenheim’s Belden told me:

The reduction in concentration risk — combined with a quarterly rebalance — has helped RSP frequently outperform the S&P 500 since the fund’s 2003 inception on a rolling basis. And RSP has never distributed a cap gain since its inception 14 years ago.

The direct link between prices and weights is pointed out by critics of market-cap-weighted indexes as the main source of potential drag on their returns, as it might result in overweighting overvalued companies and underweighting undervalued companies.

Equal weighting severs the link between a stock’s price and its weight in the index in the simplest possible way.

RSP was the first ETF to introduce a smart beta methodology when it debuted 14 years ago. Its remarkable history of outperformance confirms that simplicity works.

To learn more about the Guggenheim S&P 500 Equal Weight ETF (RSP), click here.


Grant Wasylik

Your thoughts on “Beat the S&P 500 Index with the S&P 500 Index”

  1. Hi Nancy! Expenses are definitely a factor to consider. But, RSP (with its higher expenses) has still outperformed FUSVX (with its rock-bottom expenses). Since FUSVX’s 10/14/05 inception… FUSVX has a cumulative return of 81.9% and RSP has a cumulative return of 90.3%.

  2. Yes, but my FUVSX fund has an expense ratio of 0.045% and the SPXEWTR is 0.40% – How does that effect the chart?

Comments are closed.

Originally from Pennsylvania, Grant graduated from Juniata College with an economics major and accounting minor. Since graduation, Grant has worked in the investment industry for almost two decades by serving in various roles … Prior to coming to…